There are many indicators I use when analyzing a stock. One is recent insider activity; another is unusual options activity. Finally, I believe a small portion of your portfolio, say 10% or less, can be great for speculative growth companies, as they can really juice your returns if they turn out to be successful, but won't destroy your portfolio if they don't pan out. Here are some names I feel meet that criteria:
Eastman Kodak (EK) provides imaging technology products and services to the photographic and graphic communications markets worldwide. This is a very well-known company, however it has fallen on hard times this past decade, as far fewer people are buying film and are using their digital cameras or smart phones instead. However, while the financials aren't pretty (it lost just over $1B in net income this past year and had negative revenue growth) EK has a very valuable patent portfolio, which it's currently shopping around and is seeing a lot of interest. Some estimates are as high as $3B, very significant when we see the enterprise value at just over $800M. Moreover, EK trades at just 0.05x P/S, 0.04x PEG, and 0.1x EV/S, which means that any margin improvement will lead to significant gains in its net income. I think EK is a great speculative buy here.
Level 3 Communications (LVLT) engages in the communications business in North America and Europe. The stock just recently completed its big acquisition of Global Crossing and had a 1-for-15 reverse stock split to take it out of penny stock territory. The financial performance wasn't pretty, as it lost approximately $600M in net income this past year and has a sizable debt load of well over $7B. However, management expects great synergies by combining these two companies, which will not only cut expenses, but raise theanemic -16% and -0.5% profit and operating margins. It also should be noted that accomplished value firm Southeastern Asset management owns just under 31% of the shares outstanding as of June 30, along with Fairfax owning just under 8% as of June 30. This is a nice entry point for a speculative buy.
Sprint Nextel (S), through its subsidiaries, offers wireless and wireline communications products and services to individual consumers, businesses, government subscribers, and resellers. The company has been volatile of late, as it is committed to buying 30M iPhones over the next four years, and investors are unsure if that big gamble will pay off. The operating performance has been anemic, as it lost just over $3.1B in net income this past year and has a big debt load of $18.5B; however, this can prove to be very lucrative as S is the only major carrier to offer the iPhone now with an unlimited data plan. Moreover, due to the company having such high depreciation of non-cash expenses, it was actually significantly FCF-positive (to the tune of $3B) this past year. I think this is a high quality speculative buy at these depressed levels.
Yahoo (YHOO), together with its subsidiaries, operates as a digital media company that delivers personalized digital content and experiences through various devices worldwide. The company has been in turmoil and recently had a highly publicized dismissal of former CEO Carol Bartz. Moreover, the company has been seeing declining revenue growth, but the valuations look decent with a trailing 19x P/E, forward 18x P/E, 1.6x PEG, little debt, and close to $1.50 per share in net cash. This a nice entry point.
LinkedIn Corporation (LNKD) operates an online professional network. This company has actually been profitable this past year, but currently trades at trailing 520x P/E, 310x forward P/E, 23x P/S, and 168x EV/EBITDA. These are very expensive valuations, but the company did have revenue growth in excess of 120% this past year, and has a clean balance sheet with no debt and close to $4/share in net cash. However, this company looks priced for perfection, and I don't see a rush to jump into LNKD quite yet.
Yandex N.V. (YNDX) operates an Internet search engine in Russia. Some call this the Google of Russia, since it is the dominant search engine in its country, but it trades at a lofty trailing 63x P/E, forward 33x P/E, 17.5x P/S, and 36x EV/EBITDA. This company does have a clean balance sheet as well, with no debt and close to $2/share in net cash. This company came in with a good earnings report this past week, and looks more reasonably priced than LNKD with a better business model, so I'd rather be buying YNDX than LNKD at this time.
Baidu (BIDU) provides Chinese and Japanese language Internet search services. The company has been volatile of late, as Chinese stock have in general. The valuations are lofty at a trailing 65x P/E, forward 33x P/E, 29x P/S, and 49x EV/EBITDA. The company has a good balance sheet with little debt and approximately $4.60/share in net cash. I think splitting a position with YNDX would make sense if looking at this, since they have similar valuations and the play would give you free diversification into two growing world economies.